US Dollar Reaction to NFPs Becomes Increasingly Difficult to Project
- US non-farm payrolls due out ahead of long holiday weekend
- Banks slash forecasts for monthly jobs report
- USD reaction to data becomes increasingly difficult to project
- Broader sentiment shaken on softer global data and recession fears
- Lawsuit against major US banks to be filed on misrepresentation of mortgage securities
With markets getting set for the last weekend before the end of the summer, we could very well be in for some lackluster trade on Friday, particularly with the US closed for the long holiday weekend on Monday. Nevertheless, we do have a non-farm payrolls release to deal with, and the monthly jobs report out of the US is always a potential source of volatility. Positioning and expectations ahead of the data are for a weaker result, with some major banks slashing their forecasts in recent days. Any sign of weakness in the print will likely fuel additional pressure on the Fed to implement yet another round of monetary easing and ultra accommodative policy.
As far as market reaction is concerned, it will be difficult to determine just how the US Dollar will react. A weaker result will inspire some safe haven bids (USD positive), while at the same time increase the likelihood of QE3 (USD negative). Meanwhile, a stronger NFP print will diminish probabilities for further Fed accommodation (USD positive), while at the same time generate a positive risk reaction and increased demand for risk correlated assets (USD negative). As such, it is very difficult to determine exactly the USD will respond, although technical studies have been showing a supported Greenback in recent days that could very well want to continue to extend its broad based gains.
Perhaps the technical studies which favor additional gains in the buck are factoring other variables into the equation, with overall risk sentiment looking quite shaken as fears of a global slowdown continue to materialize. Equity markets have taken a turn for the worse, while both Pimco and economist Roubini have been out talking of the probabilities for recession in the European and global economies. Economic data across the globe has not been good with the latest round of PMIs doing a good job of highlighting this fact. An overview of the PMI data shows 13 out of 24 regions dropping into contractionary territory, with many of these readings showing their lowest manufacturing component since mid-2009. Even the regions that showed better than expected results were far from robust, with the numbers coming in just over the 50 boom-bust line.
Moving on, another developing storyline which is getting attention and not helping risk sentiment at all has been the news from a New York Times article that the federal agency which overseas Fannie Mae and Freddie Mac will be filing multi-billion dollar lawsuits against more than a dozen large US banks either on Friday or next Tuesday. The lawsuit accuses these banks of misrepresenting the quality of mortgage securities that were packaged and sold off at the height of the housing bubble.
Overall, our recommendation on the strategy front would be to stay on the sidelines in Friday trade as we are never comfortable trading into the weekend and especially uncomfortable ahead of long holiday weekends which often make Friday volatility and price action all the more unpredictable. Looking ahead, the European economic calendar is rather light, with UK construction PMIs and Eurozone producer prices due out. US equity futures are tracking moderately lower, while commodities consolidate their latest moves.
EUR/USD: Although the market had recently broken higher to end a sequence of inter-day lower tops off, the overall structure remains bearish at this point, with the market still trying to put in a more medium-term lower top below the 1.4700 highs from May. Tuesday’s bearish reversal formation and subsequent bearish price action confirms outlook and from here, look for fresh downside acceleration on a daily close below 1.4250. In the interim, expect intraday rallies to be well capped ahead of 1.4400, while ultimately, only back above 1.4550 delays outlook.
USD/JPY:Although the market recently broke to fresh record lows below 76.00, failure to establish any downside momentum on the break suggests that the market could be looking to establish a more meaningful base. The latest daily close back above 77.30 encourages recovery outlook (despite the ensuing drop) and we look for additional upside over the coming sessions back towards critical short-term resistance by 80.25. Ultimately, only a daily close back under 76.50 delays constructive outlook.
GBP/USD: The market remains locked in a broader consolidation off of the April highs, and a fresh top is now sought out by 1.6600 in favor of the next downside extension back towards the recent range lows at 1.5780. Ultimately, only a daily close above 1.6550 would delay outlook and give reason for pause, while the latest daily close back under 1.6350 should accelerate declines. In the interim, look for any intraday rallies to be well capped below 1.6400 on a daily close basis. Back under 1.6100 accelerates.
USD/CHF: The latest sharp reversal off of record lows just shy of 0.7000 is encouraging and could finally be starting to signal the formation for a major base. Weekly studies are also confirming with the formation of a very bullish bottom close. From here, look for an acceleration of gains back towards the 0.8500 area over the coming days with current setbacks expected to be well supported above 0.7500 on a daily close basis.
Written by Joel Kruger, Technical Currency Strategist
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